Impact Of Foreign Direct Investment (FDI) On The Economic Growth Of Developing Economies

Project and Seminar Material for Economics

Project and Seminar Material for Economics


This study succinctly examined FDI development and its impact on the Nigeria Economy from 1995 – 2010. This trend show that FDI although had some drawbacks due to economic instability and other economic factors that militated against its rise until recent democracy and economic reforms, improved and characterized its changes significantly. The ordinary least square (OLS) method of multiple regression was used and econometric applications all used for the interpretations and analysis.

The findings conclude that FDI has significantly increase GDP growth rate and enhance foreign reserve and economic performance.

Chapter One

1.1 Introduction

The need to accelerate the pace of economic growth and development by many Countries, especially the less developed coun ies (LDC) i.e. Nigeria, have propelled them to make deliberate efforts to attract foreign direct investment (FDI).

Ezirim, Emenyeonu, Muoghalu (2002) suggested that these efforts are geared towards improving the general investment c1imat through the adoption and implementation of foreign investment. Ho ever, friendly policies and programme such as Tax incentives, export promotion significantly, the drive for foreign investment drives the various benefits it confers on the host Country. The benefits include addition of new capital, technology, improved management and market access,. FDI has also been acknowledged as a potent source of improving efficiency of the productive sector through competition, stimulation of economic progress, creation of jobs and fostering growth in the host economies.

According to Narula and Portelli (2004) over the past two decades, the growth of Multinational enterprises (MNE’s) activities in developing countries has increasingly been regarded as one of the defining characteristics of the world economy and an engine of economic growth of host economies.

Multinational Enterprises (MNEs) related externalities have been, although increased interest from developing countries because of the perceived benefits in terms of the injection of capital, technology and knowledge. However, key multinational enterprises (MNE’s) externalities include the knowledge spillovers and link es from the … MNEs to domestic firms in host countries.

The nature of these MNE- externalities may either arise from pure market transactions (e.g. Through MNE vertical linkages) or else through knowledge spillovers which take non-mar monetary firm, non-monetary firm.

The nature of these MNE – externalities may either arise from pure· market transactions (e.g. through MNE vertical linkages) or else through knowledge spillovers which take on-market or on-monetary firm.

This general, warning of attitudes towards Foreign Direct Investment (FDI) has taken place in the content of the promotion of outward looking economic strategies as envisaged by the International Monetary Fund (IMF) and the World Bank. Hence, developing countries have been undertaken policy shifts from inward-looking. import substitution industrialization models towards ore outward, export-oriented economics policies, Narula, (2001); Ozawa (2002).

This topic has assumed greater importance in the context of the anti-­globalization movement, which opposes further liberalization of international trade and investment. FDI and its developmental effects is therefore a topic which attracts considerable attention and interest from academia and policy makers (Narula and Portelli, 2004).

The abundance of natural resources in Nigeria is not in doubt as the country can boast of large reservoir of many mineral resources such as crude oil, cold, zinc, limestone, coal etc as well as skilled manpower. But due to bad management of the economic resources; lack of adequate capital resources, declining higher inflationary rates, and high rate in poverty level (which affects savings and capital formation) makes direct foreign investment or capital inevitable for the economy. This study proposal, therefore represent an attempt to examine the impact of Foreign Direct Investment on the Nigeria Economy.

1.2 Statement Of Research Problem

The statement of the research problems which necessitate carrying out this research work are:

  1. What impact does FDI has on the economic growth in Nigeria?
  2. Direct foreign investment has not contributed to the increase in Gross Domestic Product (GDP)
  3. The fiscal policy of the government does not affect the inflow of FDI to Nigeria.

1.3 Aim And Objectives Of The Study

The overall objectives and aims of the study are to understand the effect of FDI on Nigeria Economy.

The Objectives of this study are:

  1. To measure the contribution of Foreign Direct Investment to the a Nigeria Economy
  2. To examine the effect of FDl on the economic growth of Developing Countries
  3. To identify the various variables that enhance the inflow of Foreign Direct Investment to Nigeria’s Economic growth and development.

1.4 Statement Of Research Hypothesis

The hypotheses for this research are formulated in both Null (Ho) and Alternative (HA) forms.

Hypothesis 1

  • Ho: FDI inflow has no significant impact on the Nigerian Economic growth and performance
  • HA: FDI inflow has significant impact on the Nigerian Economic growth and performance

Hypothesis 2

  • Ho: Direct Foreign Investment does not contribute to in ease in Gross Domestic Product
  • HA: Direct Foreign Investment contributes to increase in Gross Domestic Product.

Hypothesis 3

  • Ho: The Industrial Production and Direct Foreign Investment affect Gross Domestic Product in Nigeria.
  • HA: The Industrial Production and Direct Foreign Investment does not affect Gross Domestic Product in Nigeria.

1.5 Research Methodology

According to Koustyanis (2000), research methodology is how data are collected and analyzed in research studies. However, the methods for this study include source of data, analytical tool (that is statistical tools etc).

1.5.1 Source of Data

The sources of data for this study are mainly from the secondary source. This secondary data for this study are related t the flow of foreign investment and Gross Domestic Product (GDP) in Nigerian economy. The secondary data are source from Cent al Bank of Nigerian (CBN) publication such as CBN Economic d Financial Review, CBN Bullion, CBN Briefs and Newsletter, Federal Office of Statistics (FOS) Bulletin and other economic management journals etc.

This study also rely on relevant information from textbooks, and electronic web materials via the internet from institution as the CBN, IMF, World Bank group et cetera

1.5.2 Statistical Tools

This also represents the analytical tools. However, for this type of research, the multiple regression statistical techniques (econometrics) regression was adopted due to its appropriateness n analyzing secondary data, since this research employed econometric modeling of the variables formulated.

The Ordinary Least Method (OLB) of multiple regression would be adopted. The OLS would be use: to estimate the models from the independent and dependent variables.

1.6 Significance Of The Study

The importance of these research work lies in the fact that its final result would be useful to policy makers in Nigeria to evaluate and create the positive or otherwise contribute to direct foreign investment to Nigeria economic growth and development and also those factors that affects its inflow, it will also be useful to investors in the area of information (when making investment decision).

Finally, it would be useful to researchers interested in carrying out further studies in the future. The research study is also important for the requirement of B. Sc. Degree programme in Economics.

1.7 Scope And Limitation Of The Study

The scope of this research work would cover only the direct foreign ­investment as no attempt will be made to study foreign investment in totality. It would also consider a period of 1999-2008 (Ten years). Dearth of data, inaccessibility of data, term and financial constraints etc, are some of the limitations that will be fatal in the process of carrying out the research work.

1.8 Definition Of Terms / Concepts

Foreign Direct Investment (FDI):

This is regarded as the flow of investment from MNCs (developed economies) to less developed.

Multinational Corporations (MNCs):

These are large corporations from develop countries that have their parents com any abroad and host firms in less developed economies.

Economic Growth:

Is defined as a long-term rise in capacity to supply increasingly diverse economic goods to its population.

Economic Efficiency:

Is the process whereby there absence of wastage of resources in the economy

Human Capital:

This is the process of skill acquisition with a view of developing human capacity and understanding which are crucial for the economic and the political development of a country

Technological development:

This is the process whereby technology adverse from one stage to another there enhancing productivity.

Impact Of Foreign Direct Investment (FDI) On The Economic Growth Of Developing Economies

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Impact Of Foreign Direct Investment (FDI) On The Economic Growth Of Developing Economies


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